1QFY22 CNP of RM61.5m (-25%) missed estimates as premiums were diminished by greater reinsurance needs. Going forward, the group could see some tough spots with greater competition in the fire insurance space with further liberalisation likely to fuel further pricing pressures. Meanwhile, claims (namely motor) are expected to return as economic activity resumes. We cut our FY22E/FY23E projections by 19%/11% to reflect this. Maintain MP but reduce our TP to RM14.10 (from RM14.20).

1QFY22 disappointed, as net earnings arrived at RM61.5m which only made up 19%/18% of our/consensus expectations. The negative deviation came from top-line weakness as we had anticipated net earned premiums (NEP) to grow rather than decline, no thanks to lower-than-expected retention ratios. No dividends were declared, as expected.

YoY, 1QFY22 NEP fell by 14% to RM217.2m due to higher cession to reinsurers. This was dragged by the fire insurance (-12%) and miscellaneous segments (-30%). Meanwhile, motor (-6%) and M.A.T. (+3%) performed moderately. Retention ratio recorded at 58.9% (1QFY21: 63.5%). Notably, investment income dropped by 34% on softer market sentiment while claims ratio rose to 47% (1QFY21: 39%) owing to the diminished premiums in the current period. This led the period’s combined ratio to come in at 76.3% (+12.7ppt). All in, 1QFY22 net profit reported at RM61.5m (-25%).

QoQ, 1QFY22 saw similar declines with NEP coming off by 15% and claims ratio rising 9.2ppt against a slight increase in claims which we reckon is in conjunction with the return of economic activities. Sequentially, net earnings came in 16% softer.

Some headwinds anticipated. Going forward, the fire insurance space will likely to continue its competitive streak from 2017’s detariffication with an upcoming review in 2HFY22 likely to steer towards more consumer-centric pricing models. That said, any changes from further liberalization would only affect new policies. Management also anticipates claims ratio (particularly motor) to rise to pre-pandemic levels as more activity is expected in the endemic phase. Amidst all this, the group aims to boost its agency workforce by 10% in FY22 to recoup from the softer performances in the prior years.

Post results, we slash our FY22E/FY23E earnings by 19%/11% as we anticipate further pressures in the group’s key fire insurance segment. Meanwhile, we anticipate claims to normalise to c.40% as the probability of claim incidences are likely to increase.

Maintain MARKET PERFORM with a lower TP of RM14.10 (from RM14.20). While we roll over our valuation base year to FY23E, we also trim our ascribed PBV from 2.6x to 2.5x (1.0SD below mean) in anticipation of softer sentiment on LPI amidst higher competition within its targeted spaces. That said, the group still has the backing of a sizeable financial institution (i.e. Public Bank) which may provide comfort on the sustainability of the group’s mid-to-long term operations, though we believe such boons are already fairly priced in at current levels.

Risks to our call include: (i) higher/lower premium underwritten, (ii) lower/higher-than-expected claims, (iii) higher/lower-than-expected management expense ratio, and (iv) further rounds of MCO.

Source: Kenanga Research - 15 Apr 2022